Bank Indonesia issues regulation on hedging transactions

As a reaction to the volatility of the rupiah over the past year, Bank Indonesia has issued a new regulation on hedging transactions. The Regulation on Bank Hedging Transactions (15/8/PBI/2013), enacted in October 2013, is expected to encourage the use of derivatives as a tool to hedge foreign currency exposure, and subsequently to reduce foreign currency spot transactions and ease pressure on the rupiah.

The following provisions are of particular note:

• Indonesian business actors are allowed to hedge their foreign exchange positions by entering into standard 'plain vanilla' option, forward or swap transactions.
• Business actors may purchase foreign currency against the rupiah for hedging purposes only if an underlying economic activity for the transaction can be proved (eg, a debt payment obligation in a foreign currency or export/import and investment). The nominal amount and the term of the purchase may not exceed the nominal amount and term of the underlying activity.
• Settlement of the hedging transaction must be undertaken through the movement of the principal fund in full. A netting settlement is allowed only in the event of force majeure or the rollover of the foreign exchange against the rupiah for hedging purposes over several economic activities, which must be supported by documentary evidence. Exemptions for the netting settlement will also prevail for business actors that use a bank's services in accordance with Bank Indonesia regulations concerning foreign exchanges against the rupiah.

The regulation affirms the permission given to state-owned entities to enter into hedging transactions, as provided in the Ministry of State-Owned Companies Regulation PER-09/MBU/2013 (September 25 2013).

Through this regulation, it is hoped that the volatility of the rupiah can be reduced and the role of the domestic foreign exchange market in stabilising the rupiah exchange can be increased.

For further information on this topic please contact Elsie Hakim at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125), fax (+62 21 250 5121) or email (ehakim@abnrlaw.com). The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.